Open or closed mortgage: choosing repayment flexibility

How much flexibility a closed mortgage offers

Many closed mortgages allow roughly 10% to 20% of the original principal to be prepaid each year, plus payment increases, without a penalty. Privileges vary a great deal by lender, so our brokers compare them alongside the rate.

Breaking a closed fixed mortgage can trigger an interest rate differential (IRD) penalty, which can be much larger than three months' interest when rates have dropped since you signed.

What an open mortgage allows

An open mortgage generally permits repayment before maturity without the kind of prepayment penalty associated with a closed mortgage. Read the agreement for payment procedures and any other fees. An open loan can be useful when sale proceeds or another confirmed source of funds will soon pay it off.

That flexibility may come with higher pricing than a comparable closed product. The useful comparison is the total cost over your expected holding period, not only the initial rate. Avoid choosing an open mortgage for a vague plan to repay quickly without checking whether that repayment is realistic.

A closed mortgage can still permit extra payments

Closed mortgages commonly include specified prepayment privileges, such as permitted lump sums or payment increases. The amount, timing and reset rules differ between lenders. Some unused privileges cannot be carried forward, and paying beyond the permitted amount may trigger a penalty.

Ask the lender how the privilege is calculated and whether it applies before a full payout. A statement showing the balance does not necessarily show the final amount needed to discharge the loan. Obtain a current payout quote if you are planning to sell or replace the mortgage.

Look at penalties and portability

An early-exit charge can depend on the rate type and lender's calculation. A fixed-rate closed mortgage may use an interest rate differential, while other products use different contractual methods. Online penalty estimates are illustrative; the lender's written quote is what you need for a transaction.

Portability can help when moving, but it has conditions involving the new property, timing and borrower qualification. “Portable” does not mean you can take the loan anywhere without review. Similarly, converting a product or blending a rate may involve restrictions or extend your commitment.

Choose for a credible timeline

If your home is already sold and you need temporary financing before closing, flexibility may be especially valuable. If you plan to stay and repay gradually, a closed mortgage with suitable privileges may be sufficient. Compare both using the same balance and expected payoff date.

Our brokers can help assess the likelihood of a move, refinance or substantial prepayment during the term. Bring any expected payout amount and its source. A mortgage should accommodate your actual plans without charging for flexibility you do not need or exposing you to an exit cost you did not anticipate.

Ask whether a payout quote changes with the intended payment date. Interest, administration charges and the contract calculation can affect the final amount. Share the quote with the professional handling your closing so the funds required are based on the actual transaction rather than an earlier estimate.

How our brokers can help

Our brokers can review your mortgage questions, explain lender requirements and compare the options that fit your plans. Where legal, tax or investment advice is needed, we will help you identify the questions to bring to the appropriate professional before you commit.